Beating The Market With Smart Beta ETFs

While the product underperforms the broader market in strong bullish periods due to its focus on defensive stocks, it has managed to beat the broader market since its inception, while keeping the risk at a much lower level.

Looking at the longer term performance of the index, S&P Low Volatility index had an annualized total return of 14.5% compared with 13.9% for the S&P 500 Total Return index.

Guggenheim S&P 500 Equal Weight ETF (RSP)

Equal weighted indexes are the simplest form of Smart Beta indexes.  This fund tracks the S&P Equal Weight Index, putting roughly 0.2% in each stock. The success of the product is mainly a result of its greater focus on mid-cap stocks compared with the market-cap weighted index.

From a sectors perspective, the fund assigns almost equal weights (16.3%) to Consumer Discretionary and Financials, while Information Technology, industrials and healthcare also have double-digit allocations.

The ETF charges 40 basis points in fees per year from investors, and has managed to attract $5.2 billion in total assets. With a decent daily volume of 750,000 shares, the bid/ask spread are usually tight.

RSP has returned 25.3% year-to-date basis, compared with 21.3% for SPY.  Looking at the longer-term, RSP has returned 147.4% compared with 114.3% for SPY in the trailing five-year period.

Bottom-Line

Not all “Smart Beta” funds have outperformed their market-cap weighted cousins. Further they usually have slightly higher expense ratios and also come with higher trading costs. But some of them have been consistently delivering better results and are worth a look.

To begin with, investors should use products based on simpler and more transparent alternative methodologies that are easier to understand.

This article is brought to you courtesy of Neena Mishra From Zacks.

Pages: 1 2

Leave a Reply

Your email address will not be published. Required fields are marked *